Here is an example of a CWB Client using CALL options to protect their exposure.
Client A – Soybean Farmer
Location: Central, Indiana
Average Temperature for June: 70.0 Degrees
Risk: Too much heat
Client A located in Central, Indiana was concerned that excessive heat during the month of June would negatively affect the yield on his recently planted soybean crop. Furthermore, this heat may cause an increase in needed irrigation and related expenses. The average temperature during the month of June is 70 degrees in the area of this acreage. This client had an on-site CWB weather gauge placed at his desired location on his soybean acreage to measure daily average temperatures.
The client purchased a binary call option structure that paid-out a fixed amount of $250,000 in the event average temperatures during June were in excess of 74.5 degrees Fahrenheit. The cost of this trade was $46,000, thus affording the client a 5.4 to 1 risk/reward payout.
The trade that was presented is as follows:
Option Type: Binary Call Option
Strike: 74.5 Degrees Fahrenheit
Max Payout: $250,000
Potential Profit: $204,000
Potential Return: 443%
# of Occurrences (Last 10yrs): 1
During the month of June, actual temperatures were 72 Degrees. The client lost his premium on the transaction; however his crop was performing well at the end of June and was on-track for an above-average yield.